On May 6, 2010, the Ninth Circuit issued its opinion in the case Au-Tomotive Gold Inc. v. Volkswagen of America, Inc., et al. in which it decided the issue of whether the sale of marquee license plates bearing Volkswagen badges that Au-Tomotive Gold (“Auto Gold”) had purchased from a Volkswagen dealer constituted trademark infringement or whether the sale of the plates was protected by the “first sale” doctrine.
Auto Gold produces and sells accessories for specific makes of automobiles. During the 1990s, Auto Gold began selling products bearing Volkswagen and Audi trademarks without permission from them. These products included license plate frames, key chains and marquee license plates. While the first two products used replicas of the company’s trademarks, the marquee license plates used actual Volkswagen badges purchased on the open market from a Volkswagen dealer. Auto Gold altered them by removing prongs and (in some cases) gold plated them and mounted them on marquee plates. The packaging that accompanied the marquee plates clearly explained that they were not produced or sponsored by Volkswagen.
After Volkswagen sent Auto Gold cease and desist letters in 1999, Auto Gold filed suit seeking declaratory relief that its activities did not constitute trademark infringement. Volkswagen and Audi counterclaimed asserting numerous claims, including trademark counterfeiting and infringement under the Lanham Act. The lower court initially granted summary judgment to Auto Gold under the doctrine of “aesthetic functionality” but the Ninth Circuit reversed this decision in an earlier appeal. The Ninth Circuit further held that Volkswagen and Audi had established their affirmative trademark infringement claims and remanded the case to the District Court to consider Auto Gold’s “first sale” defense. [Auto Gold also raised the defense of laches unsuccessfully which will not be addressed in this article.]
Auto Gold argued that because it had lawfully acquired the Volkswagen badges that had been incorporated into its marquee plates, and because its packaging disclaimed any association with Volkswagen, its product was protected under the “first sale” doctrine. The Ninth Circuit held, however, that the “first sale” doctrine did not provide a defense because the plates created a likelihood of confusion as to their origin. Specifically, the Ninth Circuit was not concerned as to whether there was a likelihood of confusion among purchasers of the plates, but rather, the Ninth Circuit focused “on the likelihood of post-purchase confusion among observers who see the plates on purchasers’ cars.”
In reaching this conclusion, the Ninth Circuit began by examining the history of the “first sale” doctrine, which was first recognized in a U.S. Supreme Court opinion, Prestonettes, Inc. v. Coty in 1924. There, the U.S. Supreme Court recognized that a defendant “by virtue of its ownership had a right to compound or change what it bought, to divide either the original or the modified product, and to sell it so divided.” The U.S. Supreme Court recognized that consumers would not be confused by the products’ manufacturer and reasoned “a trade-mark only gives the right to prohibit the use of it so far as to protect the owner’s good will against the sale of another’s product as his.”
Since then, numerous courts have applied the “first sale” doctrine and have “generally focused on the likelihood of confusion among consumers.” For instance, numerous district courts have applied the “first sale” doctrine in cases where a defendant had incorporated a trademark product into a new product and the courts in those cases have focused on “the possibility of confusion as the dispositive factor.” The Ninth Circuit recognized that a separate line of cases further illustrated the central role of the likelihood of confusion where producers commit a trademark infringement by selling refurbished or altered goods under their original trademark.
Turning to the issue before it, the Ninth Circuit recognized that it had previously held (in the earlier appeal) that “the marquee license plates create a likelihood of post-purchase confusion on the part of observers of the plates.” The Ninth Circuit found that it was “likely that a person on the street who sees an Auto Gold marquee license plate with a VW badge will associate the plate with Volkswagen” and thus, “the demand for Auto Gold’s products is inextricably tied to the trademarks themselves.”
Auto Gold argued that the likelihood of post-purchase confusion was irrelevant. The Ninth Circuit recognized, however, that Auto Gold was unable to cite any legal authority that the “first sale” doctrine applied to cases involving a likelihood of post-purchase confusion. Rather, in each case where the “first sale” doctrine had been applied, “the court either had a good reason not to be concerned with post-purchase confusion or took steps to avoid addressing the issue.”
The Ninth Circuit continued by recognizing that the issue of post-purchase confusion created “a free-rider problem.” The Ninth Circuit found that “[w]hen a producer purchases a trademark product, that producer is not purchasing the trademark. Rather, the producer is purchasing a product that has been trademarked. If a producer profits from a trademark because of post-purchase confusion about the product’s origin, the producer is, to that degree, a free-rider.”
Auto Gold argued that it was not guilty of trademark infringement since “its marquee plates are of high quality.” The Ninth Circuit rejected this argument, however, finding that “likelihood of confusion, not quality control, is `the “key-stone” of trademark law.’” The Ninth Circuit recognized that courts have consistently found trademark infringement “even where defendants are not selling lower quality goods.”
Finally, Auto Gold argued that the public interest is served if it would be allowed to continue to sell its products given that the competition would help reduce prices. The Ninth Circuit rejected this argument on the ground that “trademark law protects trademark holders from the competition that results from trademark infringement, irrespective of its effect on prices.” The Ninth Circuit concluded that the district court correctly granted summary judgment to Volkswagen on its trademark infringement claim and rejected Auto Gold’s attempt to use the “first sale” defense.
Thus, the Ninth Circus has reaffirmed that the focus in trademark infringement cases remains on the issue of likelihood of confusion.